Unit 3 QBank Questions
If a customer buys $28,000 of ABC stock in April 20XXand at year end, the stock is worth $23,000, how much may the customer deduct on his 20XX tax return? A) $0 B) $5,000 C) $2,000 D) $3,000
A) $0 Until the customer realizes the loss by selling, there is no tax deduction.
The Securities Exchange Act of 1934 regulates or mandates all of the following except A) extension of credit to customers. B) creation of the SEC. C) full and fair disclosure on new offerings. D) manipulation of the secondary market.
C) full and fair disclosure on new offerings. The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses these issues.
The DERP Corporation has a rights offering. The common stock is currently selling at $45.50. DERP is issuing one new share of stock at $40 per share for each 10 shares owned. What is the theoretical value of one right when the stock is traded ex-rights? A) $0.55 B) $0.40 C) $0.45 D) $0.50
A) $0.55 The formula for the theoretical value of a right when it is ex-rights (the buyer doesn't get the rights) is (M ‒ S) ÷ N where M = market price of the stock, S = the subscription price, and N = number of rights needed. Plug in the numbers and you have ($45.50 ‒ $40) divided by 10. That is $5.50 divided by 10 or $0.55 each
New offering: 800,000 units at $6 per unit. Each unit has two shares of common stock and one warrant. Each warrant is to purchase half a share of common stock. Based on this information, how many shares of stock will be sold, and how many warrants will be sold? A) 1.6 million shares and 800,000 warrants B) 800,000 shares and 400,000 warrants C) 1.6 million shares and 400,000 warrants D) 800,000 shares and 200,000 warrants
A) 1.6 million shares and 800,000 warrants Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains two shares, 1.6 million shares are being distributed. As each unit also includes one warrant, 800,000 warrants are being distributed.
If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 100 B) 500 C) 400 D) 300
A) 100 The investor will receive an additional 100 shares from a 3-for-2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares.
Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into half a share of common. The preferred stock is selling at $17.50, and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 2,500,000 B) 3,000,000 C) 2,000,000 D) 500,000
A) 2,500,000 One million shares of preferred, each converted to half a share of common, is 500,000 common shares, and 500,000 shares after conversion, added to 2 million shares of common previously outstanding, equals 2.5 million common shares.
GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus five rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of one right? A) 3 B) 2.5 C) 5 D) 15
A) 3 Because the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3).
ADJ Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of common stock are currently outstanding? A) 4,000,000 shares B) 5,000,000 shares C) 6,000,000 shares D) 9,000,000 shares
A) 4,000,000 shares To determine the number of outstanding shares, take the number issued minus the number in the treasury. In this question, that is 5 million minus 1 million = 4 million.
An investor owns 300 shares of XYZ common stock, currently selling for $50 per share. The investor also owns 100 shares of XYZ's 5% $100 par preferred stock currently trading at $90 per share. A 2:1 stock split is declared. After the payment date, the investor will own A) 600 shares of common at $25 per share and 100 shares of the preferred at $90 per share. B) 150 shares of common at $100 per share and 100 shares of the preferred at $90 per share. C) 600 shares of common at $25 per share and 200 shares of the preferred at $45 per share. D) 300 shares of common at $50 per share and 200 shares of the preferred at $45 per share.
A) 600 shares of common at $25 per share and 100 shares of the preferred at $90 per share. A stock split is always of common stock. In a 2:1 split, the number of shares doubles, and the price is 50% of the presplit price, which means 600 shares at $25 per share. The stock split has no effect on the preferred stock.
If a stock undergoes a 1-for-5 reverse split, which of the following increases? Market price per share Number of shares outstanding Earnings per share Market capitalization of the company A) I and III B) III and IV C) II and III D) I and II
A) I and III After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, the market capitalization of the company will not change.
Which of the following statements regarding American depositary receipts (ADRs) are true? They are issued by large domestic commercial banks. They are issued by foreign banks. They facilitate U.S. trading in foreign securities. They facilitate a foreign investor who wants to trade U.S. securities. A) I and III B) II and III C) I and IV D) II and IV
A) I and III ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.
Characteristics common to penny stocks would include which of the following? Market price less than $5 per share Market price greater than or equal to $5 per share Nasdaq over-the-counter (OTC) stock Non-Nasdaq OTC stock A) I and IV B) II and IV C) I and III D) II and III
A) I and IV Penny stocks are generally defined as those with a market price below $5 per share that are not traded on any exchange or Nasdaq.
Over-the-counter (OTC) trading practices in corporate securities are supervised by the Securities Investors Protection Corporation (SIPC). the Securities and Exchange Commission (SEC). the Federal Open Market Committee (FOMC). the Financial Industry Regulatory Authority (FINRA). A) II and IV B) I and III C) I and IV D) II and III
A) II and IV
An investor who purchased 100 shares of REDP common stock on February 28, 2019, would receive long-term capital gain treatment if the stock is sold at a profit starting A) March 1, 2020. B) March 2, 2020. C) February 28, 2020. D) February 29, 2020.
A) March 1, 2020. Investors must own a security for more than 12 months before it becomes long term for tax purposes. The first day after February 28, 2019, is March 1, 2019. Twelve months later is March 1, 2020. Always count 1 day and then add 12 month so that, in this case, you don't come up with February 29 because 2020 is a leap year.
One of your customers owns 100 shares of GTS common stock. The purchase was made two years ago at a price of $51 per share. GTS has recently declared a 3:2 stock split. At the customer's request, as soon as the new shares are in the account, you sell them and $2,000 from the proceeds of the sale is credited to the customer's account. Based on this information, the tax impact of this transaction is A) a long-term capital gain of $300. B) a long-term capital loss of $1,333 and a short-term capital loss of $667. C) a long-term capital loss of $1,400. D) a short-term capital gain of $300.
A) a long-term capital gain of $300. Immediately after the stock split, the total investment of the initial position remains unchanged at $5,100 (100 shares at $51 per share). After the stock split, the customer owns 150 shares (3/2 times 100 = 150 shares). Therefore, the adjusted cost basis per share is $34 ($5,100 divided by 150 shares). Those 50 shares were sold for $2,000 and have a cost basis of $1,700 ($34 times 50). That is a profit of $300. Alternatively, you could say that 50 shares sold for $2,000 represents a selling price of $40 per share ($2,000 divided by 50 shares), which is a $6 per-share profit ($40 minus the $34 cost basis). Fifty shares times $6 equals a profit of $300. he gain is long-term because the holding period of securities received through a stock split (or stock dividend) is that of the original purchase.
Synapse Communication Corporation (SCC) is growing. To finance the expansion, the company has a $100 million debenture offering. Attached to the offering are five-year warrants to purchase SCC common shares. Each warrant allows for the purchase of one SCC share at a price of $53 per share. Three years after the issue date, SCC stock is trading at $63 per share. Each warrant has A) an intrinsic value of $10 per warrant. B) an intrinsic value of $5 per warrant. C) no intrinsic value, only time value. D) an intrinsic value of $20 per warrant.
A) an intrinsic value of $10 per warrant. A warrant has intrinsic value when the exercise price is lower than the stock's current market price. In this question, each warrant allows the holder to purchase one share of a $63 stock for $53 per share. That is a $10 per share difference. Therefore, intrinsically, the warrant is worth $10. With two years to go, it also has time value, but the question is not dealing with that.
If your client has a $21,000 net capital loss this year, and he plans to apply the maximum deduction toward his ordinary income for the year, after this year, he may A) deduct a maximum of $3,000 per year and carry the remaining loss forward indefinitely. B) carry the loss forward indefinitely and offset capital gains only. C) carry $3,000 of the loss forward. D) not carry the loss forward.
A) deduct a maximum of $3,000 per year and carry the remaining loss forward indefinitely. Capital losses may be used to offset capital gains. Once all capital gains have been offset, $3,000 of net capital losses may be used to offset ordinary income annually. Remaining losses may be carried forward in future years until the loss is exhausted.
An American depositary receipt (ADR) is used to A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. B) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. C) sweeten a bond offering. D) finance foreign trade in which U.S. citizens are engaged.
A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States.
When compared to statutory voting, cumulative voting gives an advantage to A) minority stockholders. B) participating preferred stockholders. C) majority stockholders. D) management rather than the board of directors.
A) minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
Preferred stock comes with many different options. What type of preferred stock would be most advantageous to the investor if the issuing company had strong revenue and earnings that exceeded industry estimates? A) Cumulative B) Adjustable-rate C) Callable D) Participating
D) Participating Participating preferred stock may receive an additional amount paid to shareholders based on superior performance of the issuer. Cumulative refers to unpaid dividends that accrue on a preferred issue.
An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $50 B) $100 C) $400 D) $200
B) $100 The total value of the initial position is unchanged, remaining at $40,000 (200 times $200). After the stock dividend, the investor owns 400 shares (200 times 100% = 200 + 200 = 400) Therefore, the adjusted cost basis is $100.00 per share ($40,000 divided by 400 = $100). Perhaps you recognized that a 100% stock dividend has the same effect as a 2:1 split. That is, the stock's cost basis is cut in half.
An investor purchased 100 shares of ABC common stock valued at $6,000. What is the adjusted cost basis per share of this position after the company pays a 20% stock dividend? A) $60.00 B) $50.00 C) $72.00 D) $48.00
B) $50.00 The total value of the initial position is unchanged, remaining at $6,000. After the stock dividend, the investor owns 120 shares (100 × 20% = 20 + 100 = 120). Therefore, the adjusted cost basis is $50 per share ($6,000 divided by 120 = $50). It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same.
An investor owns 400 shares of ABC common stock. ABC's board of directors has declared a 5:4 stock split. As a result, the investor will receive how many additional shares? A) 40 shares B) 100 shares C) 500 shares D) 80 shares
B) 100 shares In a 5:4 stock split, the shareholder will own five shares for each four shares currently held. This investor owns 400 shares so, after the split, the account will have 500 shares in it. The difference between 400 and 500 is 100 additional shares. If you chose 500, that is the total number of shares that will be owned, but the question does not ask for that—it asks for the number of additional shares.
Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? A) 125 shares at $18.75 B) 125 shares at $20 C) 100 shares at $31.25 D) 100 shares at $25
B) 125 shares at $20 Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment: 125 shares × $20 = $2,500, and 100 shares × $25 = $2,500.
ABC has 1 million shares of common stock outstanding. Mr. Chen owns 100,000 shares of ABC common stock. If ABC issues an additional 500,000 shares, and assuming ABC's charter calls for preemptive rights, Chen will receive enough rights to purchase A) 20,000 additional shares. B) 50,000 additional shares. C) 15,000 additional shares. D) 10,000 additional shares.
B) 50,000 additional shares. Mr. Chen has a 10% ownership position in ABC (100,000 divided by 1,000,000). Therefore, if an additional 500,000 shares are issued, Mr. Chen has a preemptive right to maintain his 10% position. Ten percent of 500,000 = 50,000 additional shares.
Which of the following would least likely occur when a corporation engaged in a rights offering? A) The number of outstanding shares would increase. B) After successful completion of the offering, the market price would rise slightly. C) The corporation would use a standby underwriter. D) After successful completion of the offering, the market price would decline slightly.
B) After successful completion of the offering, the market price would rise slightly. Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised.
Dark pools of liquidity enhance market transparency for public retail customers. diminish market transparency for public retail customers. accommodate small transactions for institutional traders. accommodate large-volume transactions for institutional traders. A) II and III B) II and IV C) I and IV D) I and III
B) II and IV Dark pools, sometimes referred to as dark pools of liquidity, is trading volume that occurs or liquidity that is not openly available to the public. The bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets and is not visible to the public. This diminishes market transparency for public retail customers.
A tombstone ad for a new bond issue announces that warrants to purchase shares of the issuer's common stock at $75 per share are attached to the bonds. The common stock is currently traded at $45 per share and the warrants expire in five years. What is the most likely reason the issuer attached the warrants to the bonds? A) To make the bonds convertible into the issuer's common stock B) To improve the marketability of the bond issue C) To increase the dilution of the current shareholders D) To decrease the dilution of the current shareholders
B) To improve the marketability of the bond issue Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock.
The over-the-counter (OTC) market is A) all of these. B) a negotiated market. C) the first market. D) an auction market.
B) a negotiated market. The OTC market is a negotiated market. Registered market makers compete among themselves to post the best bid and ask prices.
A corporation must have stockholder approval to A) declare a cash dividend. B) issue convertible bonds. C) repurchase 100,000 shares of stock for its Treasury. D) declare a 15% stock dividend.
B) issue convertible bonds. Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholders' proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its Treasury, declaration of a stock dividend, and declaration of a cash dividend.
All of the following statements regarding the over-the-counter (OTC) market are true except A) it trades unlisted securities. B) it is an auction market. C) more issues trade OTC than on the exchanges. D) it trades listed securities.
B) it is an auction market. The OTC market is a negotiated market. The exchanges are auction markets.
One of your clients owns 300 shares of common stock in a publicly traded corporation. The acquisition cost of those shares was $60,000 and the last trade of the stock was $220 per share. There was a news report that the company was going to pay shareholders a 100% stock dividend. The client wants to know how this dividend will affect the holding. You would respond that the customer will A) still own 300 shares and the market price will be approximately $440 per share. B) now own 600 shares and the market price will be approximately $110 per share. C) now own 150 shares and the market price will be approximately $440 per share. D) now own 600 shares and the market price will be approximately $220 per share.
B) now own 600 shares and the market price will be approximately $110 per share. The effect of a 100% stock dividend is the same as a 2:1 stock split. The customer will have twice as many shares worth half as much each. That would be 600 shares worth $110 per share for a total value of $66,000. Note that the total value is unchanged from the pre-split value of 300 shares at $220 per share.
An investment banker purchasing what is left unsold from a rights offering is engaging in A) firm commitment underwriting. B) standby underwriting. C) all or none underwriting. D) preemptive rights underwriting.
B) standby underwriting. In many cases, when a corporation is issuing new shares, existing shareholders receive preemptive or stock rights to buy these new shares to maintain their current proportionate ownership. In the event some of the rights are not used, the standby underwriter agrees to purchase those unsubscribed for shares.
American depositary receipts (ADRs) are used to facilitate A) the foreign trading of U.S. government securities. B) the domestic trading of foreign securities. C) the domestic trading of U.S. government securities. D) the foreign trading of domestic securities.
B) the domestic trading of foreign securities. An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities
Common stock that has no voting power, no rights to receive dividends, that has been authorized and issued but is not outstanding is known as A) Class B common shares. B) treasury stock. C) unissued stock. D) subordinated shares.
B) treasury stock. This is the definition of treasury stock.
A registered representative has a customer looking to invest in stock for income. The customer is looking for the highest fixed rate of return available based on her risk profile. Which of the following would be least suitable? A) Callable preferred B) Cumulative preferred C) Convertible preferred D) Straight preferred
C) Convertible preferred Convertible preferred stock is convertible into the issuer's common stock. This conversion feature has value if the market price of the underlying stock should increase. Because of that feature, issuers are able to attract investor interest with a lower dividend on this preferred stock compared with preferred stock that has no conversion feature. Therefore, it would be the least suitable investment for this client.
ZYX Corporation has 100 million shares of common stock authorized in its charter, with 80 million shares outstanding. The board of directors of ZYX could vote to take which of the following actions? A) Announce an additional public offering of 40 million shares of common stock B) Issue 20 million shares of a 4%, $100 par preferred stock, convertible at $50 C) Declare a stock dividend of 10% D) Declare a 2:1 stock split
C) Declare a stock dividend of 10% A corporation cannot issue more shares than authorized. True, there could be a vote to amend the charter, but be careful not to read anything into the question that is not given A 10% stock dividend will require issuing 8 million more shares. That will bring the total outstanding to 88 million. A 2:1 stock split would need an additional 80 million shares and ZYX has only 20 million left. With only 20 million authorized, but unissued shares remaining, where is ZYX going to get 40 million shares for the additional public offering? Likewise, the convertible preferred is convertible into two shares each ($100 par divided by the $50 conversion price). That would also require 40 million shares to be available if everyone elected to convert.
Which of the following is true regarding a 5-for-4 stock split? A) The net worth of the company will be reduced. B) Retained earnings will be increased. C) Each shareholder's proportionate equity will be unchanged. D) The par value will be unchanged.
C) Each shareholder's proportionate equity will be unchanged. Because each shareholder will receive additional stock, the proportional equity will remain the same.
One of your clients asks about a recent purchase of a preferred stock. When looking at online information about the stock, the client notices that no par value is assigned. How does the company determine the amount of dividend to be paid? A) On a no-par preferred stock, the dividend is paid as a percentage of the common stock dividend. B) On a no-par preferred stock, the company has the flexibility to increase or decrease the dividend as earnings warrant. C) On a no-par preferred stock, the dividend is a stated rate. D) The board of directors determines the amount each quarter based on current interest rates.
C) On a no-par preferred stock, the dividend is a stated rate. When a preferred stock is issued without a stated or par value, the dividend rate is stated in dollars. For example, it could be a $2 preferred. That would mean quarterly dividends of $0.50; $2 per year. Although the company is under no obligation to pay a preferred dividend (unless it plans to pay a dividend on its common stock), and the board of directors can pay a partial dividend, that does not mean the dividend can be increased over the stated rate.
ABC, Inc., has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $20 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-for-1 stock split? A) The number of shares outstanding would decrease by 50%. B) The retained earnings would be decreased by $10 million. C) The par value would decrease to $5 per share. D) The market price of the stock would double.
C) The par value would decrease to $5 per share. A stock split results in more outstanding shares at a lower par value per share. In the case of a 2-for-1 split, there are twice as many shares (2 million) and the par value is cut in half ($10 ÷ 2 = $5) The total par value of stock outstanding is unchanged ($2 million times $5 = the same $10 million in total par value). Remember, a 2:1 split is the same as changing a $10 bill for two $5 bills
Which of the following are characteristics of both stock rights and warrants? A) One must be a current stockholder to receive them. B) They are frequently used as a sweetener to attract purchasers to another security. C) They offer the holder an opportunity to purchase stock at a fixed price. D) When initially offered, neither one has intrinsic value.
C) They offer the holder an opportunity to purchase stock at a fixed price. Rights and warrants are equity securities granting the holders the ability to purchase shares of the issuer at a pre-determined price. In the case of a rights offering, the price is always below the current market price. In the case of warrants, the exercise price is always above the current market price. That means only the rights have intrinsic value when initially offered. It is the warrants that are frequently attached to a new issue to make the offering more attractive. It is only the rights where one must be a current stockholder to initially obtain them. After that, they trade in the secondary market.
A company has reverse split its common stock. The effect on the earnings per share will be A) no effect. B) none of these. C) an increase. D) a decrease.
C) an increase. When a reverse split takes place, the number of outstanding shares is reduced. Because the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.
After a company splits its stock 2 for 1, an investor who owns 100 shares receives A) notice that the investor's 100-share certificate now represents 200 shares. B) another certificate for 200 shares. C) another certificate for 100 shares. D) notice to send in the current certificate to be replaced by a new certificate for 200 shares.
C) another certificate for 100 shares. After a 2-for-1 split, the transfer agent will send the investor another certificate for 100 shares. The investor is not required to return the existing stock certificate.
A share of common stock in the hands of a stockholder carries with it certain rights. Among those rights is A) entitlement to receive profits through dividends when distributed and the right to vote for the amount of that dividend. B) entitlement to receive profits through dividends when distributed but not the right to vote for who will serve on the board of directors. C) entitlement to receive profits through dividends when distributed and the right to vote for who will serve on the board of directors. D) a claim on the assets of the corporation second only to that of the company's secured creditors.
C) entitlement to receive profits through dividends when distributed and the right to vote for who will serve on the board of directors. Each share of common stock entitles its owner to a portion of the company's earnings through dividends when distributed and a proportionate vote in major management decisions such as electing individuals to the board of directors (BOD). It is the board that determines the amount and frequency of dividend payments. The common stockholders' claim is behind everyone—they are last in line.
The Securities Exchange Act of 1934 deals with all of the following except A) monitoring accounts for insider trading violations. B) marking sales long or short on an order ticket. C) filing an updated prospectus. D) filing of financial statements by broker-dealers.
C) filing an updated prospectus. Prospectus filing is a requirement of the Securities Act of 1933.
Stocks that are listed on the NYSE can also traded in all of the following except A) the third market. B) the fourth market. C) the CBOE (Chicago Board Options Exchange). D) an electronic communications network (ECN).
C) the CBOE (Chicago Board Options Exchange). NYSE-listed stocks would never be listed on an options exchange such as the CBOE; those are strictly for trading options, not stock. The third market is the trading of listed securities in the over--the-counter market. The fourth market is the use of ECNs for institutions to trade without the "middleman," a broker-dealer.
The rate on an adjustable preferred stock may be indexed to A) the Producer Price Index. B) the Consumer Price Index. C) the Treasury bill rate. D) the Dow Jones Industrial Average.
C) the Treasury bill rate. The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark.
When an issuer of a preferred stock exercises the call, it is usually at a price somewhat above the stock's par value. This excess over par is A) the call price. B) the yield to call. C) the call premium. D) the call privilege.
C) the call premium. Call premium is the term used to describe that excess over par that the issuer pays when calling in the preferred stock (or callable bond).
A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on A) the sell side only. B) each side separately. C) the total of both sides. D) the buy side only.
C) the total of both sides. The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.
A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into five shares of common stock. The conversion price of the common stock is A) $100. B) $1,200. C) $25. D) $20.
D) $20. Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into five shares, we need to know what number goes into $100 five times. That number is $20. The current market value of the preferred stock is unnecessary information.
JDX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. JDX decides to use all of the treasury stock to pay a dividend to shareholders. As a result, the number of outstanding shares is A) 10,000,000. B) 4,000,000. C) 6,000,000. D) 5,000,000.
D) 5,000,000. Treasury stock is stock that has been issued and reacquired by the company. At that point, it is no longer outstanding in the hands of the public. Sending those shares out as a dividend puts them back in the hands of the investing public. Now, all of the five million issued shares are outstanding.
Which of the following have equity positions in a corporation? Common stockholders Preferred stockholders Convertible bondholders Mortgage bondholders A) III and IV B) I and III C) II and IV D) I and II
D) I and II
A 2-for-1 split does which of the following? Increases the number of outstanding shares Decreases the number of outstanding shares Decreases par value per share Decreases retained earnings A) II and IV B) II and III C) I and IV D) I and III
D) I and III After a 2-for-1 stock split, the number of outstanding shares doubles, and the par value per share decreases by half. Retained earnings are not affected.
In order for an investor to be eligible to receive a previously declared cash dividend, the stock must be purchased A) the day before the record date. B) on the ex-dividend date. C) the day after the ex-dividend date. D) before the ex-dividend date.
D) before the ex-dividend date. The ex-date (it can be ex-dividend, ex-rights, or ex-split) is the first day on or after which a purchaser is not eligible to receive the dividend (or the rights or the split). With regular way delivery at T+2, one would have to buy the security at least 2 business days before the record date (the day the issuer makes a record of all eligible owners)
A similarity between common and preferred stock is A) both are evidence of corporate indebtedness. B) the dividend is fixed. C) they have an equal vote. D) the dividend must be declared by the board of directors.
D) the dividend must be declared by the board of directors. All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.
When comparing preemptive rights and warrants, one similarity is A) the method by which the issuer distributes them to shareholders. B) their exercise price relative to the market price of the underlying stock. C) the length of time before they expire. D) their voting privilege.
D) their voting privilege. In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor's current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.
Five years ago, a corporation issued a portion of its authorized shares. Those shares currently trade on the New York Stock Exchange. In an effort to reduce the number of shares outstanding, the issuer purchases 30 million shares from existing shareholders. The shares purchased by the issuer in the secondary market are now known as A) issued stock. B) authorized stock. C) unissued stock. D) treasury stock.
D) treasury stock. When an issuer acquires its own issued and outstanding stock, it becomes treasury stock. It can be an outright purchase, as described here, or stock received as a donation from a stockholder. Treasury stock has no voting or dividend rights. A corporation's charter specifies the number of shares that are authorized for issuance. When the corporation issues those authorized shares to raise capital, they represent the number of issued shares. When they begin trading in the secondary markets, they are issued and outstanding shares. Treasury stock is issued, but no longer outstanding.
